Autumn Budget And Spending Review 2021 - Institute For Fiscal Studies View

27th October 2021

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Autumn Budget and Spending Review 2021.

We will be providing ongoing impartial and rigorous analysis on the decisions facing the Chancellor.

An initial response from IFS researchers
The Chancellor has delivered his Autumn Budget and the Office for Budget Responsibility (OBR) has published a new set of forecasts for the economy and public finances. IFS researchers provide an initial reaction to these below.

IFS Director Paul Johnson said: "The Government is now planning to spend more on public services, and to have a more generous system of universal credit, than it was intending pre-pandemic. The increases in universal credit for those in paid work are occurring alongside increases in the national living wage. This means that the Budget and Spending Review are much more similar to Gordon Brown's than to George Osborne's. To help fund the spending increases, the Chancellor confirmed big tax rises: this year has seen the biggest set of tax-raising measures since 1993. It now looks like a large part of those tax rises is to be spent rather than being entirely used to reduce borrowing as originally announced.

If implemented, this might be sufficient to push borrowing below that expected prior to the pandemic and to see debt falling as a share of national income. Of course there is huge uncertainty over the outlook for the economy and it remains to be seen whether the tax rises will actually be implemented as announced.

The coming year will also be a difficult one for living standards. For example, for middle earners rising inflation and tax rises mean their real take home pay is set to fall by around 1%."

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Initial reaction from IFS researchers - In full
On the public finances

Stronger growth so far this year - and the Office for Budget Responsibility's judgement that the long-term damage to the economy will now be 2% rather than the 3% assumed in March - meant that the Chancellor was handed a more favourable set of economic and fiscal forecasts. Borrowing this year was revised down by just over £50 billion - though is still forecast to be £183 billion. The only times when it has been higher were last year, during the global financial crisis and during the two World Wars of the twentieth century.

In later years, the forecast reduction in borrowing was less, in part due to Mr Sunak’s decision to top up departmental spending plans, to increase spending on Universal Credit, and to freeze alcohol duties and fuel duties. Borrowing in 2024–25 is now forecast to be £46 billion which is not just lower than the £74 billion forecast in March 2021 but also lower than the £58 billion forecast prior to the first lockdown in March 2020. This might be sufficient to see debt falling as a share of national income, though the forecasts are predicated on the large tax rises announced in March (specifically income tax and corporation tax) and September (the new health and social care levy) going ahead and not being offset with new tax cuts elsewhere.

Public spending

The Chancellor used the windfall from improved OBR forecasts to top up his spending plans for the second time in as many months. Today’s top-up, combined with the extra health and social care spending announced last month, means that by 2024−25, he’s planning to spend £10 billion more than he was planning pre-pandemic. That will mean day-to-day budgets growing by an average 3.3% per year in real-terms, a sizeable package of Covid support measures for affected public services, and real-terms increases for almost all departments.

These increases are broadly comparable to (if a bit smaller than) those planned by Labour governments in the 2000s. But the key difference is the extent to which these increases are swallowed up by the NHS. 44% of the cash increases announced in today’s Spending Review for the next three years will go to the Department of Health and Social Care. The equivalent figure last year was 45%. At the Spending Reviews between 1998 and 2007, the average share going to Health was 35%, and never rose above 38%. This explains why despite relatively big increases in headline measures of spending, things might still feel tight in other areas. Perhaps nowhere is this truer than in local government, where after a jump next year, grant funding for existing services will be more or less frozen in the following two years - bigger council tax rises than the government plans to allow could be necessary to maintain services.’

Living standards

Large swathes of the population face a squeeze on living standards over the coming year. Rises in National Insurance contributions and (through a freeze to the personal allowance) income tax in April will come on top of rising inflation, taking a significant swipe at people’s spending power.

According to the new forecasts, over the next year a median earner will find their pre-tax pay just about outpaces inflation, but after the extra income tax and NICs due their take-home pay will fall by about 1%, or £180 per year, in real terms.

Many lower earners will see increases in income, though inflation and tax rises will tend to make those increases much more modest than headlines might suggest. Before tax, about half of the 6.6% increase in the minimum wage will be eaten up by inflation over the next year, meaning a real-terms rise of about 3.2%. After tax this will become a 1.2% real increase in take-home pay for a full-time minimum wage worker.

Perhaps the biggest news from today is that those with the strongest prospects for income growth as we (hopefully) emerge from the epidemic are households with someone in paid work but with a low enough income to be on universal credit. These households will keep significantly more of their benefits as a result of today’s announcements. The gains will be especially large for those who also stand to benefit from the increases to the minimum wage. A full-time minimum wage worker who is also on universal credit will have their disposable income increase by around £250 per year as a result of next April’s increase in the minimum wage, and an additional £1,000 per year or more (depending on precise circumstances) as a result of the increases in universal credit announced today.

One bigger-picture takeaway on the direction of policy towards low earners is that the minimum wage and benefits will now be working together to provide relief to living standards. This marks a reversal on recent years when they have been in a tug-of-war, and sometimes (erroneously) presented as substitutes for each other – another way in which the Sunak and Osborne chancellorships are starkly contrasting.

A group who are likely to find the coming months especially tough are households without someone in paid work. Prices are set to continue rising relatively quickly over the winter while their benefits stay the same, and while many will still be adjusting to the removal of the temporary £20 per week benefit uplift. Ultimately, real income levels for those out of work are set to return to something similar to pre-pandemic – but the road there will not be smooth, as their spending power is set to be eroded by inflation before benefit rates ‘catch up’ in April 2022 and April 2023. And all of this comes in a context where the out-of-work safety net is substantially lower than a few years ago as a result of retrenchment pre-pandemic.

Alcohol tax

The government has announced a major overhaul of alcohol taxes. Rates will be frozen until February 2023, after which all types of alcohol will be taxed in relation to their alcohol content. The biggest changes are for wine, with sparkling and low-strength wine seeing a tax cut while higher-strength wine sees an increase. However, the proposed tax rates on cider are still much lower than those on beer, wine and spirits.

Kate Smith, IFS Associate Director said: "The reforms to alcohol duty announced in today’s budget are a very welcome step. The previous system was a mess. Moving to a system that taxes all drinks in relation to their alcohol content is sensible, while having higher rates on stronger products targets heavy drinkers. However, one anomaly from the previous system remains, with cider still taxed much more lightly than other drinks under the proposed reforms."

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